Liquidation

Definition of Liquidation

Liquidation refers to the process of converting assets, typically of a business, into cash to settle debts, distribute funds to creditors, and ultimately close down the entity.

Liquidation involves selling off tangible and intangible assets, paying off liabilities, and distributing remaining funds to shareholders.

Liquidation can occur voluntarily, initiated by business owners when the company cannot meet its financial obligations, or involuntarily through legal actions due to insolvency.

The goal of liquidation is to orderly wind down a business's affairs, resolve financial obligations, and distribute assets according to established priorities and legal procedures.

What is Liquidation?

Liquidation is the organized process of selling off assets, converting them into cash, and distributing the proceeds to settle debts and obligations.

Liquidation is often used when a company becomes financially insolvent and cannot continue its operations.

Liquidation can be voluntary, where business owners decide to close down and distribute remaining assets, or involuntary, when creditors or courts compel the process due to non-payment of debts.

This procedure aims to fairly address financial responsibilities, reimburse creditors, and conclude the business's existence while adhering to legal guidelines.

Types of Liquidation

Voluntary Liquidation

Members' Voluntary Liquidation (MVL)

Occurs when a solvent company's owners decide to wind down operations and distribute assets to shareholders. Typically, this happens when a company's purpose has been fulfilled or owners wish to retire.

Creditors' Voluntary Liquidation (CVL)

Involves a solvent company's directors acknowledging insolvency and opting to liquidate assets to pay off debts to creditors. It is a formal process that aims to ensure equitable distribution to creditors.

Involuntary Liquidation

Compulsory Liquidation

Initiated by creditors or courts, this occurs when a company cannot pay its debts and is insolvent. The court orders the sale of assets to settle liabilities and distribute remaining funds to creditors.

Winding-Up Petition

Creditors can file a winding-up petition to initiate compulsory liquidation if the company owes them a substantial debt.

Members' Voluntary Liquidation (MVL)

A solvent company's shareholders decide to dissolve the business and distribute its assets among themselves, typically upon completion of its purpose.

Creditors' Voluntary Liquidation (CVL)

Directors of a financially distressed but potentially solvent company choose to liquidate assets to repay creditors and settle obligations.

Compulsory Liquidation

Triggered by a court order due to insolvency, creditors' pressure, or public interest, this process involves the forced sale of assets to satisfy debts.

Provisional Liquidation

A temporary form of liquidation to safeguard assets during disputes or investigations, preserving the company's value until a formal decision is made.

Members' Compulsory Liquidation

Directors or shareholders apply to the court for compulsory liquidation based on the belief that it is in the company's best interests.